How Bankruptcy Can Help With Back Taxes

How Bankruptcy Can Help With Back Taxes

Debt Consolidation in Georgia


If you owe back taxes (federal, state, or local), this can be a tremendous stress. Many people inquire as to whether filing bankruptcy can help deal with their tax debt. While every situation is different and needs to be assessed by a qualified bankruptcy attorney, there are ways in which a bankruptcy filing may help you with your back taxes.

If you owe money for back taxes, the IRS or State Revenue Department can garnish your wages or your bank account. Filing a bankruptcy will stop a tax garnishment. This is what is known as the automatic stay, which requires all creditors (including the taxing authorities) to immediately cease collection action. What happens to your taxes next depends on the chapter of bankruptcy you are filing.

Chapter 7 Bankruptcy

Certain taxes are dischargeable in a Chapter 7 bankruptcy. Here are the general rules regarding dischargeability of taxes in Chapter 7 Bankruptcy.

The Three-Year Rule

The tax return was due at least three years ago. Most returns are due on April 15 for the previous tax year. If the taxes were due from a return filed on April 15, 2017, they would be eligible for discharge (provided all other criteria are met) after April 15, 2020.  Do not forget to take extensions into consideration. This means that the three year rule applies to the extension date.

The Two-Year Rule

You must have filed the return at least two years before you filed your bankruptcy case. If you don’t file a return, sometimes the IRS will file one for you. Many bankruptcy courts do not consider that a return for purposes of fulfilling this rule.

The 240 Day Rule

The taxes must have been assessed at least 240 days prior to filing Chapter 7. When the taxing authority enters the liability on its records, they have “assessed” it. This doesn’t necessarily happen the minute you file your return. It could take weeks or months. In some cases, the taxing authority will audit your return and assess additional taxes years after the return is filed. This period could be tolled or extended if you filed an offer in compromise with the IRS or if you filed a bankruptcy case during that period that was discharged or dismissed.

Chapter 13 Bankruptcy

If you cannot discharge your income tax liability in Chapter 7, you can certainly treat the income tax liability in Chapter 13 Bankruptcy Plan of Reorganization. This means that you can propose to pay back the tax liability over a period of up to five years. The Chapter 13 will also stop future interest and penalties from accruing on the amount outstanding.

Your attorney will determine which taxes are and are not dischargeable in Chapter 7.

Matthew Cherney

Website: http://cherneylaw.com

At Cherney Law Firm LLC, clients can expect the highest quality legal representation alongside thoughtful counseling and attention to detail. Mr. Cherney dedicates his time to properly investigating every possible avenue of debt relief for his clients before simply stepping into bankruptcy. Seeking to make each consumer that comes to him for legal aid as comfortable as possible, he keeps his clients in the loop with every step he takes.

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